“With over three decades of experience in the financial industry, David Edwards simplifies and clarifies the process by which his clients achieve their financial goals.”

Firm:

Heron Wealth

Job Title:

President

Biography:

David Edwards is president and founder of Heron Wealth, which provides financial planning, investment advice and estate planning to individuals and families across the United States and in Europe.

David graduated from Hamilton College with a concentration in History and Mathematics, and holds an MBA in General Management from Darden Graduate School of Business at the University of Virginia.

David contributed over 100 columns to TheStreet.com. He is quoted frequently in Bloomberg, Wall Street Journal, Reuters, InvestmentNews, Money, Financial Planning and many other financial news sources. David serves as a member of the Investment Adviser Association serving on the Legislation and Technology committees, and is an advisory board member for eMoney. Prior to founding Heron Wealth, he was associated with Morgan Stanley, JP Morgan and Nomura Securities developing investment products and quantitative trading models.

David competes in sailing regattas from New England to the Caribbean and coaches a home town team in New York Harbor.

Education:

MBA, General Management, University of VirginiaBA, History/Mathematics, Hamilton College

This is a common trade-off question among families who have a substantial liability like a mortgage and also have a substantial asset – in your case an inheritance, but also appreciated company stock or stock options, or simply other savings.

Let’s presume that your original mortgage was $200K, 30 years at 3.5%. At present, you’re paying about $900/month, of which about 60% is interest and 40% is principle. You’re getting a tax break on the interest amount, so your after tax cost is closer to 2.75%. Meanwhile, you could invest in a balanced (70% stocks/30% bonds) portfolio of tax efficient ETF’s and obtain 6.5% (our projection net of advisor fees over the next 20 years.) So why wouldn’t you just invest in the market and pocket the difference of 3.75%? Well, of course, the 3.5% is locked in, but the 6.5% is ONLY a projection – you could have a couple of poor stock market returns and really regret not just paying off the mortgage.

Ah, but that’s the advantage of the balanced portfolio over a pure stock portfolio. 30% of $800K in bonds is $240K reserved in stable value securities. You could pay off the mortgage at any time from the bonds, and still have funds working in the stock market for when it recovers (and it always does.)

Let’s say your $800K does indeed return 6.5% on average, so $52K in the first year. You can easily route an extra $1000 a month in principal pay-down to your mortgage, which reduces the remaining term from 28 years to 10 – play with this calculator https://www.bankrate.com/calculators/home-equity/additional-mortgage-payment-calculator.aspx for more ideas. At that point, your investment portfolio, net of $12K/year, should be worth around $1.3 million. Alternatively, you could payoff the mortgage entirely now, invest $620K in the same strategy. After 10 years, your portfolio would be $1 million. If you also invested the $7200/year in cash flow savings from retiring the mortgage, your portfolio would grow to $1.15 million.

Our net recommendations:

Balanced (stocks and bond) not all stock portfolios for the assets

Commit to extra principal payments to cut the life of the mortgage in half

Preserve the tax benefit of the interest deduction for now

Preserve the decision making flexibility in investments that is not available in illiquid real estate equity.

It's frustrating, I know, that you can't do want you want to do immediately without providing the documentation necessary to establish an estate account and transferring over the assets. The brokerage industry determined decades ago that your advisor can't simply accept instructions from a third party without complying with the procedures that prove you are indeed the executor.

In our experience, the process of obtaining the necessary testamentary letters (esate documents) takes 2-4 weeks, establishing the estate account and transferring the assets over can be done in 1-3 days. The brokerage house should "step-up" the cost basis information on the existing positions (so that you don't incur a capital gains tax on sales.) and also provide you with an account valuation as of the date of death, which you'll need for the estate tax return.

"Stars" with High Market Growth Rate and High Relative Market Share (e.g. Amazon.) These companies typically have high P/E Ratios.

"Question Marks" with High Market Growth Rate, but Low Relative Market Share (e.g. Nokia.) These companies typically have lower P/E ratios than their industry group average, or N/A if the company is making losses.

"Cash Cows" with Low Market Growth Rate, but High Relative Market Share (e.g. McDonald's.) These companies have P/E ratios close to the overall stock market, but higher than peers.

"Dogs" with Low Market Growth Rate, and Low Relative Market Share (e.g. SuperValue Groceries.) These companies typically have lower P/E ratios than the overall stock market and their industry group average, or N/A if the company is making losses.

Simply calculating the P/E won't tell you much. You have to compare the P/E to the company's industry group, market sector and the overall stock market. The company valuation tab in Morningstar will give you the comparable data by industry group and overall stock market. This free resource https://csimarket.com/Industry/Industry_Data.php is a little hard to sleuth through (click on the valuation tab) but will give you the comparable data by industry group and sector.

In general, P/E ratios will be higher in the fast growing technology sector and lower in the slow growing consumer staples sector. P/E's will expand when the economy is doing well, but interest rates remain stable. P/E ratios fall when interest rates are rising.

You can also apply the PE/G ratio. Take the trailing P/E ratio, and divide by analysts' average estimates of forward growth. If the ratio is less than 1 (e.g. a P/E of 15 divided by a forward growth rate of 20% = 0.75) then the stock offers "Growth At a Reasonable Price" or GARP. In the current environment, very few stocks have a PE/G ratio less than 1, implying that most stocks are fairly or overvalued.

Lastly, you should understand that the PE ratio is only one tool for evaluating a stock's valuation. We use about 10 valuation ratios and 5 technical ratios in evaluating stocks for our portfolios. We actually prefer stocks with low P/S (Price/Sales) ratio and high operating margin (e.g. Apple.)

You can also subscribe to Morningstar. Their research process will give you a range of "fair value" stock prices, including the prescription to buy at this level and sell at that level. Most stocks in their database fall into the "fair value" range, which makes sense. Other investors will aggressively buy an undervalued stocks and aggressively sell an overvalued stock, driving prices back into the range.

Alas, trading for a living without institutional resources and a long apprenticeship is NOT likely to be a fruitful endevour for you.

I started investing at age 17 back in 1979. By the time I was 30, I felt like I had a good handle on the work, and by age 35 I felt confident enough to invest for clients. At present, we have a full time investment research team spending tens of thousands/year on Bloomberg terminals and research who do this work as a full time job.

We compete in the markets against the really good investors, the mutual fund complexes, the exchange traded funds and the high frequency traders. Casually dropping into this enviroment is like casually dropping in on a scrimage with a pro football team - you're gonna get crushed!

If you have some spare cash, buy the plainest of plain vanilla index ETF funds through Vanguard, Fidelity, or Schwab. You'll get a projected return of about 8%/year over the next several decades without lifting a finger. To learn more about ETF's specifically, or investing in general, visit our resource page at https://heronwealth.com/investment-guides-library/

We talk with our clients about the “glide path to retirement.” In your 30’s and even 40’s, it is appropriate to have a portion of assets set aside in low risk securities such as cash or short term government bonds for emergencies. The rest, particularly assets you won’t touch until retirement, should be 100% equities. After 50, we start dialing up the percentage of bonds to about 25% when you are 5 years from retirement, 30% or even 35% when you retire for good.

You actually have flipped that strategy with aggressive stock funds in your taxable (and immediately accessible) accounts, conservative bond funds in your TSP (retirement) account. We absolutely would NOT recommend that you place 100% of your TSP account in the G fund (which currently yields only 2.75%) or in the F fund (which is index to the Barclays Aggregate and currently yields 2.61%.) Those funds barely cover inflation, leaving you with a pretty poor retirement income stream. By comparison, we project that a 70% equity/30% bond allocation will earn, after fees, 6.5% over the next 20 years (the projections are derived from Ibbotson’s estimates.)

We would recommend that you rebalance your non-retirement accounts to all bonds over three years. Yes, you will have to pay capital gains taxes, but at least we can spread out the pain. For every $1000 that you reduce your stock exposure in your taxable accounts, invest $500 in the C Fund (large cap-S&P 500 index fund), $350 in the S Fund (mid and small cap index fund) and $150 in the I Fund (international index fund.) Thereafter, in retirement, set your asset allocation across all accounts so that you have 35% bonds (mostly in your taxable accounts, but some in your TSP), 55% US stocks, and 10% international stocks.

When you retire for good, you could draw 4% from your total portfolio assets without ever running out of money. You would draw first from your taxable accounts, probably drawing them down to zero after 10 or 15 years. Meanwhile, your TSP account would continue to grow tax deferred. Eventually (for sure starting at 70 ½) you would draw from your TSP for your retirement income.

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